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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
O R D E R Per Bench
These are appeals by the assessee against the common order dated 12.04.2018 of the CIT(Appeals)-13, Bengaluru relating to assessment years 2011-12 to 2014-15. In the impugned order, the CIT(Appeals) has upheld the order of the AO treating the assessee as an assessee in default u/s. 201(1) of the Income-Tax Act, 1961 [“the Act”] and levying interest on tax that ought to have been deducted on date on which it should have been paid to the credit to the Central Govt. till such time it is actually paid u/s. 201(1A) of the Act.
The issue that arises for consideration in this appeal is as to whether order u/s. 201(1) and 201(1A) of the Act treating the assessee as an assessee in default for not deducting tax at source and levying interest on tax not deducted at source respectively can be sustained?
The brief facts are that the assessee corporation is established by an Act of the Parliament to provide for certain benefits to employees in case of sickness, maternity and employment injury and to make provision for certain other matters in relation thereto. The corporation is under the control of both central and state governments and governed by Ministry of Labour and Employment. Some of the relevant sections from the Employees State Insurance Corporation Act, 1948 are extracted below:-
3. Establishment of Employees' State Insurance Corporation– (1) With effect from such date as the Central Government may, by notification in the Official Gazette, appoint in this behalf there shall be established for the administration of the scheme of Employees' State Insurance in accordance with the provisions of this Act a Corporation to be known as the Employees' State Insurance Corporation. (2) The Corporation shall be a body corporate by the name of Employees' State Insurance Corporation having perpetual succession and a common seal and shall by the said name sue and be sued. 16. Principal officers. — [(1) The Central Government may, in consultation with the Corporation, appoint a Director-General and a Financial Commissioner.] (2) The Director-General shall be the Chief Executive Officer of the Corporation.
(3) [The Director-General and the Financial Commissioner] shall be whole-time officers of the Corporation and shall not undertake any work unconnected with their office without the sanction of the Central Government 2 [and of the Corporation]. (4) [The Director-General or the Financial Commissioner] shall hold office for such period, not exceeding five years, as may be specified in the order appointing him. An outgoing [Director- General or Financial Commissioner] shall be eligible for re- appointment if he is otherwise qualified. (5) [The Director-General or the Financial Commissioner] shall receive such salary and allowances as may be prescribed by the Central Government. (6) A person shall be disqualified from being appointed as or for being [the Director General or the Financial Commissioner] if he is subject to any of the disqualifications specified in section 13. (7) The Central Government may at any time remove [the Director-General or the Financial Commissioner] from office and shall do so if such removal is recommended by a resolution of the Corporation passed at a special meeting called for the purpose and supported by the votes of not less than two-third is of the total strength of the Corporation.
17. Staff — (1) The Corporation may employ such other staff of officers and servants as may be necessary for the efficient transaction of its business provided that the sanction of the Central Government shall be obtained for the creation of any post [the maximum monthly salary of which [exceeds such salary as may be prescribed by the Central Government. (2) (a) The method of recruitment, salary and allowances, discipline and other conditions of service of the members of the staff of the Corporation shall be such as may be specified in the regulations made by the Corporation in accordance with the rules and orders applicable to the officers and employees of the Central Government drawing corresponding scales of pay :
Provided that where the Corporation is of the opinion that it is necessary to make a departure from the said rules or orders in respect of any of the matters aforesaid, it shall obtain the prior approval of the Central Government. Provided further that this sub-section shall not apply to appointment of consultants and specialists in various fields appointed on contract basis.] (b) In determining the corresponding scales of pay of the members of the staff under clause (a), the Corporation shall have regard to the educational qualifications, method of recruitment, duties and responsibilities of such officers and employees under the Central Government and in case of any doubt, the Corporation shall refer the matter to the Central Government whose decision thereon shall be final.] (3) Every appointment to [posts [(other than medical posts)] corresponding to [group A and group B] posts under the Central Government] shall be made in consultation with the Union Public Service Commission: Provided that this sub-section shall not apply to an officiating or temporary appointment for [a period] not exceeding one year. [Provided further that any such officiating or temporary appointment shall not confer any claim for regular appointment and the services rendered in that capacity shall not count towards seniority or minimum qualifying service specified in the regulations for promotion to next higher grade.] (4) If any question arises whether a post corresponds to a 3 [group A and group B] post under the Central Government, the question shall be referred to that Government whose decision thereon shall be final.] 93. Corporation Officers and servants to be public servants. — All officers and servants of the Corporation shall be deemed to be public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860).”
According to the assessee, it has all the characteristics of an organ of the government. Based on this the Assessee was always calculating the perquisite value on accommodation provided to its employees under the bonafide belief that it is an organ of the government even after the amendment of Rule 3 in the year 2001. The employees of the Assessee are allotted unfurnished quarters. The value of the perquisite in the form of providing accommodation to its employees had to be computed by the Assessee. After such valuation the Assessee has to include the value of perquisite in the income under the head salaries and deduct tax at source as employer. While determining the value of perquisites the Assessee applied Sl.No.1 of Table-1 of Rule 3 of the Income Tax Rules, 1962 (Rules). According to the Revenue Sl.No.1 of Table-1 of Rule 3 of the Rules is not applicable to the Assessee as they cannot be considered to be employees either holding office or post in connection with the affairs of the Union or of such State. The relevant table and Rule-3 is as follows:-
“Rule-3: Valuation of perquisites For the purpose of computing the income chargeable under the head Salaries, the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely : (1) The value of residential accommodation provided by the employer during the previous year shall be determined on the basis provided in the Table below:
TABLE I Sl. Circumstances Where Where accommodation is No. accommodation is furnished unfurnished (1) (2) (3) (4) (1) Where the License fee The value of perquisite as accommodation is determined by the determined under column provided by the Central (3) and increased by 10% Central Government or any per annum of the cost of Government or any State Government furniture (including State Government in respect of television sets, radio sets, to the employees accommodation in refrigerators, other either holding office accordance with the household appliances, air- or post in rules framed by conditioning plant or connection with the such Government as equipment) or if such affairs of the Union reduced by the rent furniture is hired from a or of such State. actually paid by the third party, the actual hire employee. charges payable for the same as reduced by any charges paid or payable for the same by the employee during the previous year. (2) Where the accommodation is provided by any other employer and (a) where the (i) 15% of salary in The value of perquisites as accommodation is cities having determined under column owned by the population (3) and increased by 10% employer, or exceeding 25 lakhs per annum of the cost of as per 2001 census; furniture (including (ii) 10% of salary in television sets, cities having refrigerators, other population household appliances, air- exceeding 10 lakhs conditioning plant or but not exceeding equipment or other similar 25 lakhs as per 2001 appliances or gadgets) or if census; such furniture is hired from (iii) 7.5% of salary a third party, by the actual in other areas, hire charges payable for the in respect of the same as reduced by any period during which charges paid or payable for the said the same by the employee accommodation during the previous year. was occupied by the employee during the previous year as reduced by the rent, if any, actually paid by the employee. (b) where the Actual amount of The value of perquisite as accommodation is lease rental paid or determined under column taken on lease or payable by the (3) and increased by 10% rent by the employer or 15% of per annum of the cost of employer. salary whichever is furniture (including lower as reduced by television sets, radio sets, the rent, if any, refrigerators, other actually paid by the household appliances, air- employee. conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, by the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the employee during the previous year. (3) Where the Not applicable 24% of salary paid or accommodation is payable for the previous provided by the year or the actual charges employer specified paid or payable to such in serial number (1) hotel, which is lower, for or (2) in a hotel the period during which (except where the such accommodation is employee is provided as reduced by the provided such rent, if any, actually paid or accommodation for payable by the employee: a period not exceeding in aggregate fifteen days on his transfer from one place to another)
Provided that nothing contained in this sub-rule shall apply to any accommodation provided to an employee working at a mining site or an on-shore oil exploration site or a project execution site, or a dam site or a power generation site or an off-shore site— (i) which, being of a temporary nature and having plinth area not exceeding 800 square feet, is located not less than eight kilometers away from the local limits of any municipality or a cantonment board; or (ii) which is located in a remote area : Provided further that where on account of his transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one such accommodation which has the lower value with reference to the Table above for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodations in accordance with the Table. Explanation : For the purposes of this sub-rule, where the accommodation is provided by the Central Government or any State Government to an employee who is serving on deputation with any body or undertaking under the control of such Government,— (i) the employer of such an employee shall be deemed to be that body or undertaking where the employee is serving on deputation; and (ii) the value of perquisite of such an accommodation shall be the amount calculated in accordance with Sl. No. (2)(a) of Table I, as if the accommodation is owned by the employer.”
If Sl.No.1 of Table-1 of Rule 3 of the Rules is not applicable then value of perquisite has to be computed in accordance with Sl.No.2 of Table-1 of Rule 3 of the Rules and if so done then the value of perquisite will be much more and consequently the amount of tax that has to be deducted by the Assessee as an employer on the income under the head salaries paid by the Assessee will be much higher. The Assessee had consequently deducted less tax at source on the income under the head salaries paid to its employees. The ITO(TDS) therefore initiated proceedings u/s.201(1) of the Act and treated the Assessee as Assessee in default u/s.201(1) of the Act in respect of tax short deducted at source and also levied interest thereon u/s.201(1A) of the Act.
According to the AO, the perquisite value of accommodation provided to employees working in autonomous bodies/undertakings under the control of State/Central Government and semi Government organizations, is required to be computed in accordance with the amended provisions of Rule-3 of IT Rules, 1962, consequent to amendment of Rule- 3 w.e.f. 01-04-2001. Circular issued by the Central Board of Direct Taxes, New Delhi vide No.13/2002 dated 23-12-2002 gives the background of the Amendment which is as follows:
"Extraction from Circular No.113/2002 dated 23-12-2002 The Rules for valuation of perquisite are as under: 1. Accommodation- Under the Old Rule-3 for purpose of valuation of the perquisite of unfurnished accommodation all employees were divided into three categories: (i) Central and State Government employees, (ii) Employees of public sector undertaking and semi-government organization and (iii) Others including private sector employees. Under the new Rule for the purposes of valuation of perquisite of accommodation, employees are divided into two categories: (i) Central & State Government employees: and (ii) Others.
For employees of the Central and State Government the value of perquisite shall be equal to the license fee charged for such accommodation. For all others, i.e. those salaried taxpayers not in employment of the Central Government and the State Government, the valuation of perquisite in respect of accommodation would be at prescribed rates. The rate is 10% of ‘salary’ in cities having population exceeding four lakhs as per the 1991 census. For other places, the perquisite value would be 7.5% of salary.” According to the AO in the light of the aforesaid background in 7. which the amendment to the rules were made, the AO initiated the proceedings u/s.201(1) of the Act. The contention of the assessee was that they are autonomous bodies/undertakings. The employees of these organizations have been agitating over the fact that the perquisite value should be worked out considering them on par with Government employees.
The AO rejected the contentions of the assessee and held that valuation of perquisites had to be done by the assessee by taking 15% of the salary as value of perquisites under Sl.No.2 of Table 1 of Rule 3 of the I.T. Rules. The AO rejected the contention of assessee that the assessee was a Central Govt. providing accommodation to its employees.
On appeal by the assessee, the CIT(A) confirmed the order of AO. Hence this appeal by the assessee before the Tribunal.
At the time of hearing of the appeal, it was pointed out that this Tribunal in the case of CFTRI v. ITO, TDS in to 1611/Bang/2011 for the A.Ys. 2007-08 to 2011-12 by order dated 4.7.2014 holding that CFTRI is not a Central Govt. and therefore value of perquisites cannot be made on the basis of licence fee paid to the Govt. for accommodation provided by Govt. and that 15% of the salary will be the valuation of perquisites.
It is not disputed before us that the facts and circumstances of the assessee's case are identical to the case decided by the Tribunal referred to above and therefore the grievance of the assessee projected in this appeal to the extent already decided by the Tribunal in the aforesaid case cannot be accepted.
The ld. counsel for the assessee further pointed out that though Rule 3 of the Rules has been amended from 1.4.2001, the assessee has been entertaining under a bona fide belief that it was Central Govt. and therefore perquisites will have to be valued in accordance with Sl.No.1 of the Table under Rule 3 of the I.T. Rules. It was also submitted by him that the assessee believed that it was a Central Govt. as the entire control and rules & regulations applicable to the employees of Central Govt. being applicable to the assessee also, which all led to the belief that assessee was instrumentality of Central Govt. It was further pointed out by him that assessee has been deducting tax at source as it has been doing prior to the amendment of law and even after the amendment of law from A.Ys. 2001-02 to 2010-11 and even thereafter. The Revenue has taken proceedings only in the A.Y. 2010-11 against the assessee. The impugned proceedings having started only on 25.2.2013 by issue of a show cause notice by the DCIT, TDS, Central 16(2), Bangalore. It was his submission that whenever there is a bona fide estimation of income under the head 'salary', there cannot be any liability u/s. 200(1) of the Act. In this regard, our attention was drawn to the following decisions:-
CIT v. Nestle India Ltd., 243 ITR 435 Gwalior Rayon Silks v. CIT, 140 ITR 832 MP
Besides the above, decision of the Bangalore Bench of the Tribunal in ACIT v. Infosys BPO Ltd. 150 ITD 132 was also cited on behalf of the assessee. In all the aforesaid decisions, the view expressed is that the assessee’s obligation is only to make an estimate of income under the head ‘salaries’ and such estimate has to be a bona fide estimate.
The law on the issue as explained in the decision of ITAT Bangalore in the case of Infosys BPO is as follows:-
“26. It is no doubt true that TDS is to be made at the time of payment of salary and not on the basis of salary accrued. Sec.192(3) of the Act permits the employer to increase or reduce the amount of TDS for any excess or deficiency. We have already noticed that the fact that bills/evidence to substantiate incurring of expenditure on medical treatment up to Rs.15,000/- and the availing of the LTC by the employees and the fulfilment of the conditions contemplated by Sec.10(5) of the Act for availing exemption by the employees so availing LTC, have not been disputed by the AO. Even assuming the case of the AO, that at the time of payment the Assessee ought to have deducted tax at source, is sustainable; the Assessee on a review of the taxes deducted during the earlier months of the previous year is entitled to give effect to the deductions permissible under proviso (iv) to Sec.17(2) or exemption u/s.10(5) of the Act in the later months of the previous year. What has to be seen is the taxes to be deducted on income under the head ‘salaries’ as on the last date of the previous year. The case of the AO is that LTC and Medical reimbursement should be paid at the time the expenditure is incurred or after the expenditure is incurred by way of reimbursement and not at an earlier point of time. If it is so paid, then, even though the payment would not form part of taxable salary of an employee, the employer has to deduct tax at source treating it as part of salary, is contrary to the provisions of Sec.192(3) of the Act and cannot be sustained. The reliance placed by the AO on the expression “actually incurred” found in Sec.10(5) of the Act and proviso (iv) to Sec.17(2) of the Act, in our view cannot be sustained. In any event, the interpretation of the word “actually paid” is not relevant while ascertaining the quantum of tax that has to be deducted at source u/s.192 of the Act. As far as the Assessee is concerned, his obligation is only to make an “estimate” of the income under the head “salaries” and such estimate has to be a bonafide estimate.
The primary liability of the payee to pay tax remains. Section 191 confirms this. In a situation of honest difference of opinion, it is not the deductor that is to be proceeded against but the payees of the sums. To reiterate, the payment towards medical expenditure and leave travel is made keeping in view the employee welfare. The exclusion in respect of payment towards medical expenditure and leave travel is considered after verifying the details and evidence furnished by the employees. No exemption is granted in the absence of details and/or evidence. The exemption in respect of medical expenditure is restricted to expenditure actually incurred by the employees, or Rs. 15,000/- whichever is lower. The exemption is granted even if the payment precedes the incurrence of expenditure. The requirements/conditions of section 10(5) and proviso to section 17(2) are meticulously followed before extending the deduction/ exemption to an employee. No tax can be recovered from the employer on account of short deduction of tax at source under section 192 if a bona fide estimate of salary taxable in the hands of the employee is made by the employer, is the ratio of the following decisions. CIT vs. Nicholas Piramal India Ltd (2008) 299 ITR 0356 (BOMBAY); CIT v. Semiconductor Complex Ltd [2007] 292 ITR 636 (P&H) CIT vs. HCL Info System Ltd. [2006] 282 ITR 263 (Del) CIT v Oil and Natural Gas Corporation Ltd [2002] 254 ITR 121 (Guj) ITO v Gujarat Narmada Valley Fertilizers Co. Ltd [2001] 247 ITR 305 (Guj) CIT v Nestle India Ltd (2000) 243 ITR 0435 (DEL) Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832 (MP) ITO v G. D. Goenka Public School (No. 2) [2008] 306 ITR (AT) 78 (Del)
Usha Martin Industries Ltd. V. ACIT (2004) 086 TTJ 0574 (KOL) Nestle India Ltd. v. ACIT (1997) 61 ITD 444 (Del) Indian Airlines Ltd. v ACIT (1996) 59 ITD 353 (Mum)”
The ld. counsel for the assessee accordingly prayed that the orders u/s. 201(1) and 201(1A) be cancelled.
The ld. DR relied on the orders of the revenue authorities. According to him, the constitutional validity of Rule 3 was challenged in Ashok Kumar & Ors. v. UOI & Ors., 286 ITR 89 (SC). In the decision rendered on 15.9.2006, the Hon'ble Apex Court held that amendment to Rule 3 by the Income Tax 22nd Amendment Rules, 2001 was valid. According to him, after rendering of the aforesaid decision, the assessee could not have entertained a bona fide belief that it was a Central Govt. The ld. DR also pointed out that the Tribunal in the case of KPTCL v. ITO in to 2300/Bang/2017, order dated 2.5.2018, has accepted the plea of bonafide estimate of income under the head ‘salaries’ on the basis of facts prevailing in that case, where the KPTCL was earlier part of the State of erstwhile Mysore and after formation of statutory corporation, the employees of State Govt. became the employees of the Corporation and on those facts the Tribunal came to the conclusion that the assessee cannot be treated as assessee in default.
The ld.DR also pointed out that in the case of Indian Institute of Science v. DCIT in order dated 27.02.2015, the plea of bonafide belief was put forth by the assessee before the CIT(Appeals). He also placed reliance on the decision of the Bangalore Bench of Tribunal in the case of National Dairy Research Institute v.
ACIT(TDS) [2018] 94 taxmann.com 19 (Bengaluru – Trib.) wherein on a similar plea of bonafide belief, the Tribunal held as follows:-
“As regards, the alternative contention of the appellant that tax was not deducted at source on the value of perquisite of accommodation in terms of clause (ii) of sub-rule (1) of Income- tax Rules on account of entertaining a bona fide belief that the employees of the trust are Central Government employees, the term 'bona fide belief' has not been defined under the provisions of the Income-tax Act, 1961 but the provisions of sub-section (22) of section 3 of General Clauses Act, 1897 defines the term 'bona fide belief' to mean that a thing shall be deemed to be done in good faith where it is in fact done honestly, whether it is done negligently or not. Thus, if the element of honesty is present, the requirement of good faith is satisfied. But this requires to be judged taking into consideration the factual situation prevailing in a particular situation. In the instant case, no factual foundation is laid as to how the appellant has entertained a bona fide belief that its employees can be treated as Central Government employees. Therefore, no relief can be granted based on bald assertion without any actual foundation. There is no merit in the argument of the appellant that the appellant had entertained the bona fide belief and, therefore, no tax was deducted. This argument is also dismissed.”
The ld. counsel for the assessee in reply pointed out that the constitutional validity of Rule 3 alone was in dispute in the case of Ashok Kumar (supra) and the question as to whether the assessee was a Central Govt. or not was never in dispute and the bona fide belief entertained by the assessee cannot be found fault with. The ld. counsel for the assessee placed reliance on the decision of Bangalore Tribunal in the case of Indian Institute of Science (supra) and KPTCL (supra).
We have considered the rival submissions. It is no doubt true that in the decision rendered by this Tribunal in the case of Indian Institute of Science (supra), the plea of bonafide estimate was put forth by the assessee before the CIT(Appeals), but in the present case no such plea was put forth by the assessee before the CIT(Appeals). The fact, however, remains that there was confusion with regard to, whether statutory corporations such as the assessee and its employees could be regarded as employees of Central Govt. In fact, the very foundation for such belief entertained by the assessee is found in Rule 3 of the Income-tax Rules, 1962 prior to its amendment w.e.f. 1.4.2001. In the written submissions filed before the Tribunal, it has been contended by the assessee that only in the survey that was conducted in 2014 by the revenue, that the assessee was put on notice that its belief that its employees were employees of Central Govt. was not correct. Under these circumstances, the estimate made by the assessee u/s .192 of the Act for the AY 2011-12 to 2013-14, with which we are concerned in the present appeals, cannot be said to be not bonafide. We are of the view that the facts of the case in the present appeals are identical to the case decided by the Tribunal in the case of Indian Institute of Science (supra) as well as National Dairy Research Institute (supra). The obligation u/s. 192 of the Act on the part of employer to deduct tax at source on payment of salary is on the basis of rates in force in the financial year in which the payment is made on the estimated income of assessee under the head ‘salary’. The legislature has used the expression ‘estimated income’ and therefore the estimate if it is a bonafide estimate, could absolve the assessee of its obligation u/s. 192 of the Act. We are, therefore, of the view that in the facts and circumstances of the present case, the assessee has made a bonafide estimate of employees salary by valuing the perquisite in the form of residential accommodation provided to the employees, as if the employees were employees of Central Govt. Therefore, the assessee cannot be held to be ‘assessee in default’ u/s. 201(1) and consequently, not liable to pay interest u/s. 201(1A) of the Act. We hold and direct accordingly and allow the appeals of the assessee.
In the result, all the appeals of the assessee are allowed.
Pronounced in the open court on this 28th day of August, 2019.